Tax Liens vs Tax Deeds

When a property owner fails to pays property taxes one of two things happen depending on the state they live in. If they live in a tax lien state the government auctions off what is called a tax lien certificate. An investor buys the certificate and takes over the government’s first position credit status. This makes the investor first in line for payment. If the property owner doesn’t pay up the property goes to auction and creditors are paid from proceeds of the auction. Since the investor in the tax lien certificate is first in line they are paid first.

Tax deeds also become available when a property owner doesn’t pay property taxes. But in a Tax Deed State no liens are put on the property first. The govenrment auctions off the property at a tax sale and the successful bidder becomes the owner of the property. Some states allow for a redemption period but in a pure deed state there is no chance for the property owner to get the property back. Tax deed investors want to get the property and sell it for a profit or they may want to build on the property. Tax deeds are more expensive than tax liens and are considered riskier also. The tax deed investor is responsible for property management of the property where the lien investor is not.

Each state is classified as either a Tax Lien State or a Tax Deed State. The list below shows each state’s classification

Tax Lien Certificate States- Alabama, Arizona, Colorado, Florida, Illinois, Indiana, Iowa, Kentucky, Louisiana, Maryland, Mississippi, Missouri, Montana, Nebraska, Nevada, New Jersey, New York, Ohio, Oklahoma, South Carolina, South Dakota, Vermont, Washington D.C., West Virginia, and Wyoming.

Tax Deed States– Alaska, Arkansas, California, Idaho, Kansas, Maine, Massachusetts, Michigan, Minnesota, New Hampshire, New Mexico, North Carolina, North Dakota, Oregon, Pennsylvania, Utah, Virginia, Washington, and Wisconsin.

The third group of states are referred to as Redeemable Deed States. These are the deed states mentioned previously where there is a period during which the delinquent property owner can come back and redeem the property after paying the taxes plus penalties and interest. These states are: Connecticut, Delaware, Georgia, Hawaii, Rhode Island, Tennessee, and Texas.